GST implications on the supply of equipment
2014 case note - disputant lessor of the equipment and the supplier for GST purposes - supply, assignment.
Goods and Services Tax Act 1985
The Taxation Review Authority ("TRA") confirmed the Commissioner of Inland Revenue's ("the Commissioner") assessments for goods and services tax ("GST") and shortfall penalties. The TRA found the disputant remained the lessor of the equipment and the supplier for the purposes of the Goods and Services Tax Act 1985 ("GST Act"). Therefore the disputant was liable for the GST on the leased equipment it provided its customers and shortfall penalties for not taking reasonable care.
The disputant purchased equipment from equipment vendors using funds borrowed from a finance company ("Finance Limited"). The disputant leased this equipment to its customers under lease agreements which were assigned to Finance Limited. The rental payments paid under the lease agreements were made to Finance Limited. The disputant claimed input tax credits on the purchase price of the equipment but did not return the output tax on the lease rental payments. The Commissioner says that the disputant is liable to return GST on these payments.
To finance the purchase of the equipment, the disputant entered into a Vendor Assignment Facility Agreement ("the Master Agreement") with Finance Limited. Under the Master Agreement, Finance Limited paid the purchase price (including the GST) to the equipment vendor. The disputant (the Vendor under the Master Agreement) assigned its rights under the agreements with its customers ("Customer Agreements") to Finance Limited.
The Master Agreement set out the terms on which the assignments were made. The assignments could be either Mortgage Assignments or Absolute Assignments. An Absolute Assignment represented a sale by the vendor to Finance Limited of the equipment and rights under the Customer Agreement. A Mortgage Assignment represented a security interest over the equipment to Finance Limited.
All but one of the assignments entered into by the disputant with Finance Limited were in the form of Mortgage Assignments not Absolute Assignments.
The Mortgage Assignment provided that in consideration of the amount advanced (the Assignment Amount), the vendor (disputant) assigned all title and property in the equipment, all rights, title and interest in the Customer Agreement and all amounts payable.
Pursuant to the Mortgage Assignment, the disputant agreed (inter alia) to pay to Finance Limited, monies received from the customer under the Customer Agreement. The Customer Agreement was subject to GST and provided that all rental payments are GST exclusive and GST must be paid to the vendor.
The customer would then make the rental payments into a "lock box" bank account in the name of "[Finance Limited] t/a. [disputant]". Finance Limited had unrestricted access to this bank account and the rental payments, while the disputant's access to the account was limited solely to viewing transactions and balances.
The disputant contended that he understood the assignments between Finance Limited and the disputant were not Mortgage Assignments but a hybrid under which the disputant retained ownership of the equipment and the disputant's right, title and interest in the rental payments were assigned absolutely to Finance Limited. The disputant says that Finance Limited was therefore the supplier and responsible for payment of the GST.
The TRA found the Commissioner's witness, Mr B, to be a reliable witness who had a clear knowledge of Finance Limited's contractual documents and the company's practices and procedures. The TRA accepted Mr B's evidence that at the time that the Mortgage Assignments were entered into Finance Limited's computer, they were incorrectly coded as Absolute Assignments resulting in automatically generated letters and documents (including those described above).
The TRA was not satisfied that there was any hybrid arrangement in place. Instead, the TRA found that there was no variation of any sort to the Mortgage Assignment and that the assignments of the Customer Agreements were assignments by way of mortgage to Finance Limited.
The TRA went on to find under the Mortgage Assignment, that the disputant in consideration of the sum advanced by Finance Limited, assigned by way of mortgage to Finance Limited, the equipment and the disputant's rights under the Customer Agreement. The disputant therefore remained the lessor of the equipment and the supplier for the purposes of the GST Act.
In relation to the tax invoices issued by Finance Limited, the TRA confirmed that a supplier will be liable for GST on a taxable supply whether or not they have issued a tax invoice. The fact that Finance Limited may have issued tax invoices or that the disputant may not have done so, does not displace the disputant's liability to pay GST.
Finally, in relation to the shortfall penalty, the TRA agreed with the Commissioner's submission that a taxpayer of ordinary skill and prudence would have recognised the obligation to account for the GST on a careful reading of the documents, as these were not complex documents. The TRA was satisfied that the disputant had not acted as a reasonable person would have done in the same circumstances.